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Hedging Best(SPY-SH), Best Combo3, Best(SPY-Cash) or SPY with the Best(Short) Large-Cap

The four tables below demonstrate the effect of hedging using various percentages of the indicated long portfolio value. The simulation is for the period Jan-2-2000 to April-1-2014 and is reconciled every quarter. The tables were generated with downloadable P123 data and this spreadsheet.

Disclaimer

Please be aware that all results shown are from a simulation and not from actual trading. They are presented here for information purposes only and shall not be construed as advice to invest in any assets or purchase any subscriptions mentioned, described or advertised. Out-of-sample performance may be much different. Backtesting results must be interpreted in light of differences between simulated performance and actual trading, differences between subscriber performance and live out-of-sample model performance, and an understanding that past performance is no guarantee of future results.

All investors should make investment choices based upon their own analysis of the asset, its expected returns and risks, or consult a financial adviser. The designers of this model are not registered investment advisers. GEOV LLC (A Connecticut limited liability company) and its agents disclaim any liability for losses incurred while acting upon information provided by the Company or its agents.

24 comments on “Hedging Best(SPY-SH), Best Combo3, Best(SPY-Cash) or SPY with the Best(Short) Large-Cap”

Yes, if the previous shorts are not listed in the most recent date row, then they get covered on Mondays and new short positions get initiated as per top row of table. Sometimes there may be no short positions.

If you now have $100K in Combo3 and you want to hedge 50% of this with Best Short than each short positions should be initiated with $10K because there are a maximum of 5 shorts in the model.

So last week you would have been 30K short which you would have been covered today. According to my calculation those 3 short positions would have produced a gain of 1.5% over the week. So after you covered the shorts you would have $30,450. Also you have $20,000 free which was not used. Therefore the total available to the short model is now $50,450.

For the week starting on May 12 there is only one short position, and 20% of the funds available would be allocated to it, 20% of $50,450= $10,090.

At the start of every quarter the model gets re-balanced. Assume that on July 1 the long portfolio has a value of $110,000 and the short portfolio $54,000. So the short portfolio increase in value was $4,000 giving you a total of $114,000 in available funds. One would now invest $114,000 long and hedge it with $57,000, and so on.

You are correct, last week’s 3 trades did not produce a gain. I did my calculation long before the market closed when the stocks were lower. Using the closing prices there was a small loss as you can see in the May 12 performance picture.

We will make a spreadsheet available for downloading which calculates performance CAGR and also annual return for each calendar year 2000-2013. One can then select on past performance the best hedge percentage for one’s desired risk profile. After that one would have to check weekly performance of one’s long and short models.

As you know we are updating several models weekly at iM and this information could be used to monitor combined performance.

We can simulate market neutral by hedging Best(Short) with SPY at 100% of current short position holdings which excludes cash. This can be done on P123. This would have provided from 2000 to 2014 an annualized return of 19.0% with a maximum draw-down of -22.1%. Slippage for hedge was assumed at 0.12% in these figures.

I thought if you chose the option in the P123 simulation under the “Hedge Mkt Timing” tab, “Percent of Current Holdings” instead of “Percent of Total Equity”, then it would vary the hedge to the slots that were filled.

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